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No durable solution: Pakistani rupee’s fall
Publication Date : 27-09-2013
After weeks of inaction and confusion, the State Bank of Pakistan intervened on Thursday to prop up the free-falling rupee. The step was taken when the rupee touched the historic low of 110.5 against the dollar. The intervention has helped stabilise the rupee at 106 to the dollar for now.
But will this rescue attempt set a pattern and if the answer is in the affirmative, is this a sustainable, acceptable way of influencing the exchange rate? This intervention can be viewed as a violation of the $6.6bn loan agreement with the IMF. It is yet not clear if and how the bank’s action will affect Islamabad’s relationship with its last-resort lender.
As the rupee fell, initially, the depreciation was put down to declining foreign exchange reserves. According to one theory, the IMF loan would help stabilise the currency. It did not. The IMF conditions that bar the State Bank from supporting the rupee and force it to purchase dollars from the market to accumulate reserves created a supply gap.
The lender’s refusal to frontload a chunk of the loan did not help either. Speculators jumped into the fray to make quick profits.
The government’s decision to borrow $625 million from commercial banks to boost the central bank’s meagre reserves of just above $5bn failed to reverse the rupee’s slide as official and private capital inflows were low.
The rupee’s fall demonstrates the fragility of the economy. It also shows the confusion in the present finance management team. Fears that this sharpest depreciation of the rupee in recent years would end up fuelling already soaring prices thus eroding savings and incomes and putting greater pressure on the government’s weak fiscal position were something to reckon with, but even these could not compel the bank to take measures to arrest the slide.
The Pakistani rupee’s future hinges on the government’s capacity to restore the market sentiment by discouraging unnecessary imports to reduce the dollar demand.
This will send a message to speculators that the government is serious about defending the currency. Over the next six months, it will be required to move swiftly to recover unpaid PTCL privatisation proceeds, auction 3G telecom licences, obtain the promised funds from multilateral lenders and work for the early release of the outstanding Coalition Support Fund dues from the US.
The pumping of State Bank dollars will only ensure temporary relief the bank had to spend $3.35bn in the last fiscal to hold up exchange rates artificially. That is a prohibitive exercise. Repeating it will have drastic effects on the economy.